Thursday, August 09, 2012

In spite of the low interest rate environment, investors continue to be attracted to bond funds. As the below chart shows, fixed income mutual funds continue to attract investors' funds. However, this flow of funds into fixed investments is not inhibiting the rise in the U.S. the equity market though.

Given the low level of cash in money market mutual funds as a percentage of all mutual fund assets it may be that investors have parked their cash funds into bond mutual funds. If/when investors do decide to allocate more funds to equities, fixed income investors may be in for a rude awakening. "Buyer beware" for fixed investors seems an appropriate caution in this environment. Historically, strong flows into fixed mutual funds have not coincided with a rise in the equity market. Something appears as though it needs to give.

Individual investor bullish sentiment as reported by the American Association of Individual Investors did see a rise in bullish sentiment this week. Bullish sentiment rose six percentage points to 36.47% versus 30.45% in the prior week. Additionally, the bull/bear spread flipped from a negative 4.48 to a positive 9.12. The six week moving average remains near a low 30, however, the trend is beginning to indicate a turn higher. Are individual investors being coaxed off the sidelines?

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